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Compensation Fundamentals

HRA-NCA Compensation and Benefits Conference


Presented by:
Theresa Lynch Consulting Director, Rewards Practice
Mitchell Bardolf Senior Consultant, Executive Compensation Practice

2014 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only.

The critical role of market pricing, salary structures and job leveling
Compensation plays a critical role in organizations ongoing and increasingly challenging

efforts to attract, retain and motivate a talented workforce


It is an important component of an organizations Reward, Talent and Engagement strategy
Compensation design and management play a vital role in aligning employee behavior with
business objectives
Human capital costs represent a significant part of most organizations cost bases; they need
to spend their limited resources as effectively as possible

Market Pricing

Market pricing provides the vital


external market perspective and data
needed to develop cost-effective,
market-relevant compensation
designs and manage pay effectively

Market pricing supports a range of


pay program designs (base pay, shortterm incentives and long-term
incentives)

Salary Structures

Job Leveling

Salary structures help organizations


manage compensation by aligning
pay with the competitive
marketplace, recognizing the relative
internal value of different jobs, and
maintaining the cost-effectiveness of
pay programs

Job leveling creates a common


language across the organization for
describing job requirements and
performance expectations and
facilitates the development and
communication of career paths
through the organization

They provide a framework for


rewarding performance, making
consistent pay decisions, and linking
career paths and pay opportunities,
and can provide a framework for
total rewards design and delivery

It also provides consistent alignment


of reward and talent management
programs (e.g., workforce planning,
succession planning) and helps
facilitate the integration of new
organizations and other
organizational structure changes
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2014 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only.

Top attraction drivers: Employers largely understand the top


reasons employees choose to join an organization

But there is a disconnect on the importance of job security.

Sources: 2014 Towers Watson Global Workforce Study and 2014 Towers Watson Global Talent Management and Rewards Study
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2014 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only.

Top retention drivers: The employer and employee view is similar,


but with important gaps

As with attraction, employers underestimate the importance


of job security; and miss the criticality of trust and confidence
in senior leadership.
Sources: 2014 Towers Watson Global Workforce Study and 2014 Towers Watson Global Talent Management and Rewards Study
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2014 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only.

Market Pricing

Market pricing overview


Market pricing provides information to support decisions about how
much and how to pay
The goal is to keep the organization from:

Underpaying, and losing talent to competitors, or being unable to attract the

talent it needs
Overpaying, and wasting organizational resources or impeding desirable turnover

Market pricing is a descriptive, not a prescriptive activity. Market data are


not the answer theres often more to the story
Its an imperfect way to make sense of incomplete data

The secret is the ability to spot the imperfections and either eliminate them or
work around them

A combination of art and science

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2014 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only.

Why do we market price?


Market pricing helps organizations understand the influence of supply and
demand on the cost of labor

Where is the market shifting, how quickly, and by how much?


How competitive is our pay? Are our attraction and retention issues a
result of pay or something else?
Talent Readily Available

Limited Available Talent

$$$$

Reduced Labor Cost

Increased Cost
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2014 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only.

Why do we market price? (cont.)


It provides organizations with data for informed decision making:
How should we allocate resources?
How well are we delivering against our compensation philosophy?* Can
we afford to bridge gaps between where we are now and our target
competitive position?
Is the way we deliver pay consistent with the mix other companies
deliver?
What do market practices suggest for ongoing compensation
management?
Its essential to developing market-based reward programs
Based on detailed understanding of business and HR objectives
Anchored in a companys HR strategy
*An organizations compensation philosophy articulates the vision, mission and values that inform
the way the organization designs and manages its compensation programs. It also directly informs
the requirements for market data and the way we go about market pricing.
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2014 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only.

Market pricing:

One of the many supporting elements of all pay decisions


Performance Information

Informal/Formal
Individual/Team/Business
Unit/Organization

Compensation Information

External

Surveys and other analyses

Recruiting feedback

Trends and prospective changes

Final Pay
Decision

Communicate
with Employee

Internal equity

Incumbents Current Pay Levels


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2014 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only.

The limitations of market pricing


Numbers imply a precision that is not necessarily accurate
Only as valid as the salary survey data being referenced
Data not always available in sufficient detail especially for narrowly
defined talent markets or small/developing countries

Published compensation surveys do not have every position, and often do


not include hot skills roles

Cannot provide insights into value of non-benchmark jobs


May cloud the organizations judgment about taking internal equity into
account

Cannot be the only input for making individual pay decisions


Cannot replace business rationale and sound decision making
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2014 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only.

Market pricing process


Step 1
Select jobs to be
market priced and
gather job content
documentation

Step 2
Determine/confirm
relevant talent
market(s)

Identifying the
Determine

relevant talent
benchmark jobs. A
market for
benchmark job is a
benchmark jobs may
position you can
influence target
match to a survey
market position
job. They serve as
anchor points
A talent market is
where you
Definite job
compete for,
responsibilities/
recruit and lose
scope
employees
Understand job

Keep in mind target


duties and
markets vary on:
responsibilities to
ensure good
Competitors
matches

Size
Job titles are
helpful indicators, Geography
but often
Talent market
camouflage
definitions will
organizationinform which data
specific variations
to gather and
whether any
differentials will
need to be applied
to survey data

Define relevant
survey scope cuts
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Step 3

Step 4

Step 5

Step 6

Identify data
sources

Match positions Gather and interpret Adjust and finalize


and validate with compensation data
market rates
client

Sources of
compensation data:

Match your jobs


to survey jobs

Published surveys

Match jobs based


on job content, not
title

Custom cuts of
published surveys
Custom surveys
Club surveys
Internet sites
Select survey
sources, different
sources are right for
different analyses
Compare your
selected surveys to
each other to ensure
elements are
compatible
Refresh your
knowledge of the
surveys and review
the surveys for
changes
Review regulatory/
contractual
requirements

Identify cases
where premiums
or discounts may
be appropriate

Gather
compensation data
Know what data
youre going to
need to pull, so
you pull the right
data the first time
Keep in mind pay
element
considerations,
there are a myriad of
different tax and
accounting
regulations in each
country that impact
how pay is provided

Adjust raw market


data
Age the data
Select the data to be
included in the
market rate
Weight the data to
develop the final
market rate
Ensure that your
sample size is
sufficient
Review scope and
weightings
Apply differentials

Keep in mind pay


elements by region

Apply premiums or
discounts

Understand your
data and how it will
be used

Consider compound
adjustments
Address nonbenchmark positions

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2014 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only.

Salary Structures

The development of a new pay structure is about deciding the


trade-offs in three areas
Market Relativity

Internal Equity

New Pay
Structure

Individual Contribution

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2014 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only.

Key factors to consider in range design


People orientation, need for cost management compared to flexibility to
reward for performance for roles that create value in the organization

Market orientation, whether closely aligned to market pay rates, or with an


emphasis on internal equity

Approach to pay progression


Organization design and culture, especially the role of hierarchy emphasis
on horizontal vs. vertical movement

Availability of market data


Complexity
Ability of organization to effectively manage pay i.e., need for stronger
structural control of pay

Other cultural factors e.g., segmentation vs. one business


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How the prevalent models compare


Narrow
Grades

Wide
Grades

Broad Bands

Many narrow pay grades

Fewer pay grades

A few wide pay bands used to manage


both career growth and pay

Range Design
Description

Typical Range
Width

Midpoint
Differential

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Max of
Level #1

1
100% +

60 - 80%

30% - 50%

Approximate #
of Grades

3
1

Min of
Level #1
20 30

12 15

58

10% 15%

20% 35%

No Midpoints

Used as control points

Referenced less frequently,


more typical to reference
thirds or quartiles within
the range

May use data points or zones


within bands as market
anchors
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How do we pick which type of structure to use?


A salary structure should reflect an organizations structure and management values
One key question is how much the organization emphasizes managing its people vs.
managing its costs

Traditional/Narrow/Thin grade

Companies with this type of


organization structure

Broad band

Hierarchical
Multiple layers
Many jobs/titles
Finite distinctions between
grades/bands

and these management


values

Flatter organization
Fewer levels/layers
Fewer jobs/titles

Centralized control
Focus on jobs more than
individual employees
Focus on promotion vs. career
growth
Internal equity
Greater emphasis on
managing labor costs
Decentralized control with greater
emphasis on line manager
accountability
Person based
Focus on career growth vs.
promotion
Externally focused
Flexible

tend to use this approach


to base salary

Analysis-heavy job evaluation


models
Multiple, narrower grades/ranges
Pay is an administrative function

Competency-based plans
Fewer, broader grades/bands
Flexible salary increase guidelines
Pay is a strategic lever used to
drive business objectives and
reinforce cultural norms

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2014 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only.

Structure development process


Step 1
Organize jobs into
levels or grades
Assignment of jobs to levels
typically reflects an
organizations philosophy
about the relative importance
of internal value relative to
external market value. Level
assignments can vary
significantly depending on the
approach
Focus on internal value
Focus on competitive
market
There is no single correct
number of levels

Step 2
Review market rates
for benchmark jobs

Step 3
Determine range
midpoints and midpoint
progressions

When designing a market- The midpoint of a salary range


should approximate the market
based structure, it is
rates for the jobs in that level at
important to understand
the organizations targeted
both how market rates vary
competitive position and reflect
within a given level and
the pay target for a fully
how market rates progress
competent employee performing
from level-to-level
at a satisfactory level
It is important to identify
Review the average and median
any job families for which
market rates for all positions in a
the market rates are
given level (excluding any outliers)
consistently, significantly
and determine a preliminary
higher or lower than those
midpoint for each level in the
of the majority of jobs
structure

Step 4
Determine range
spreads
Range spreads will vary
depending on the structure
chosen, the objectives they are
intended to support (e.g., career
paths, promotions, etc.) and the
types of positions in a level

Key factors influencing range


spreads:
Midpoint progression
Market range for benchmark
jobs in each level
People orientation
Market orientation
Degree of prescriptive-ness
Review the progression of
Organization design and
preliminary midpoints from level
culture
to level. Midpoint progressions
Complexity
should generally be consistent
Global consistency vs. local
from level to level or increase with
market practices
increasing seniority
Role of base pay in total
rewards portfolio and EVP
Revise preliminary midpoints as
necessary to obtain a smooth
progression from level to level
through the structure

Step 5
Calculate overlap
between ranges
Range overlap is a measure
of the difference in value of
positions in adjoining grades
Often driven by market data
and midpoint progressions
slope of pay opportunity
Degree of overlap can
impact employee
motivation to seek
promotions, training and
growth opportunities (how
appropriate or not an
overlap is depends on the
role type , the local country
context and legislative
environment)
Formula:
100 x (max of lower grade min of higher grade)
(max of lower grade - min of
lower grade)
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The position of an employees salary in a range is typically


correlated with skills, performance, and experience
Many organizations define expectations about the skills, performance, and

experience associated with pay at different positions within a single salary range
These expectations provide context for goal-setting, performance management
and pay decisions
For example, the table below shows how an organization might map a position in
range to performance and skill development

Employee
Stage

Employee
Attributes

INVESTMENT

ASSET

New Entrant/Newly Promoted

Skilled

Highly Skilled

Uniquely Skilled

Minimal Experience

Experienced

Highly Experienced

Expert

Performs Most Job Requirements

Performs All Job Requirements

Performs All Job Requirements

Performs All Job Requirements

Developing Skills

Emergent High-Level Skills

Developed High-Level Skills

Consistent Application of High-Level


Skills

Unknown/Satisfactory Performance

Satisfactory/Good Performance

Strong Performance

Sustained Strong Performance

Low Market Demand for Skills

Moderate Market Demand for Skills

Moderate Market Demand for Skills

High Market Demand for Skills

Quartile 1

Salary
Range
Min

INTELLECTUAL CAPITAL

Quartile 2

Quartile 3

Quartile 4

Salary
Range
Max

Midpoint
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Range penetration and compa-ratios show how an employees


pay progresses with increasing skill and performance
As employees mastery of their roles increase, their salaries progress

through the salary range


Range Penetration describes how far into a range an individuals pay has
progressed, allowing easy comparison with a rubric such as the example on
the preceding page
Formula:

Range Penetration = (pay range minimum) / (maximum minimum)

Compa-ratios express the relationship between base salary and the


midpoint of a pay range

Calculated for individuals, groups of individuals or the entire organization

Typically not used in broad band structures


Formula:

Compa-ratio = pay / pay range midpoint

In market-based narrow or wide grade structures, range midpoints

represent the competitive market. Position in range thus also provides


insight into the competitiveness of an employees pay

Especially helpful as a proxy for competitiveness of pay for employees in non-benchmark


positions

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Job Leveling

A Rewards and Career Framework supports a range of business


drivers
Business Drivers
Nimble change and growth
strategy
Attraction and retention of
key talent/pivotal roles

Rewards and Career Framework


Tied to business strategy and internal values
Creates a common language across the
organization

Rapid, global expansion

Provides a basis for describing job requirements


and performance expectations

Employee value proposition


alignment

Facilitates the development and communication of


career paths through the organization

Cost management

Links to external market surveys

Unified talent development


and deployment process

Provides consistent alignment of reward and talent


management programs (e.g., workforce planning,
succession planning)

Merger and acquisition


integration

Facilitates integration of new organizations and


other organizational structure changes

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Towers Watsons Reward and Career Framework


Supporting the Employee Life Cycle
Workforce Analytics
& Planning

Development and
Career Management

Staffing & Selection

Performance
Management

Compensation &
Benefits

Succession
Management

Competency Model
Reward and Career Architecture

Job Leveling
A systematic process of determining the
relative value of jobs in an organization
Job Family Architecture
The infrastructure for organizing jobs
(job codes, job titles, functions, disciplines)

Inputs
Business Context

Reward and
Talent Strategy

Job Content

Employee Data

Market Data

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Rewards and Career Architecture Solutions use a common set of


bands and levels
Management Role

Executive
VP

SVP

EVP

CEO

Management
Supv

Mgr

Sr Mgr

Grp Mgr

Sr Grp Mgr

Professional/Expert

Individual Contributor Role

Entry

Intermed

Career

Specialist

Master

Expert

Technical Support
Entry

Intermed

Senior

Lead

Business Support
Entry

Intermed

Senior

Lead

Supv

Production
Entry

Intermed

Senior

Lead

The architecture serves as a foundation for organizing jobs and clarifying career paths
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Approaches to Global Compensation Design:


Global Job Architecture and Leveling

A global job architecture and leveling protocol is the foundation for


efficient global reward and talent management

It provides a mechanism for allocating reward investments in support of an


organizations total rewards strategy

Global leveling provides transparency and a common organizational


language, which are key to:
Ensuring internal equity: which roles are comparable?
Career and competency development: what do career paths look like?
Talent mobility and succession planning: where does key talent reside, and what
opportunities are available across the organization?

Understanding the staffing model: what are the implications for job design, span of control,
and responding to changing business processes?

Workforce planning: what kind of talent will the organization need, and where should it
focus its recruiting and development efforts?

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Job Leveling Overview:

The Towers Watson Point of View

Job leveling is
A systematic process of determining the relative value of jobs in an organization
A system for analyzing and comparing different jobs according to the overall responsibilities
and scope of each job

It is not concerned with the volume of work, or with the person doing it, or with current pay

Purpose
Establish a framework for:

Defining jobs and hierarchy


Providing a foundation for reward and talent management decisions including base pay, incentives,
career management, workforce planning, learning and development
Creating a flexible, adaptable means of communicating career paths and facilitating talent mobility

Goal
A consistent, internally relevant and market-supported approach that can be understood by
everyone involved

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Integrated Rewards and Career Framework:


Sample Pay Delivery Model

Management Role

Global Grading Job Level


Executive
VP

SVP

EVP

Long-term
Incentive
Eligible

Management
Supv

Mgr

Sr Mgr

Grp Mgr

CEO

Sr Grp Mgr

Individual Contributor Role

Professional/Expert
Entry

STI Target

Career

Specialist

Master

Annual
Incentive
Eligible

Expert

Business Support
Entry

Intermed

Senior

Lead

Supv

Spot Award
Eligible

Production
Entry

Salary Grade

Intermed

Intermed

Senior

Lead

Low

High
10%

10%

10%

15%

20%

20%

25%

30%

40%

LTI Target

30%

35%

40%

50%

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Integrated Rewards and Career Framework:

Using Leveling results to develop a Global Salary Structure

Local Market
Data

Common Leveling
Framework

Local Market
Data

125k

95,000 150,000

$155k

102k

85,000 125,000

$120k

85k

60,000 100,000

65k

40,000 80,000

$125,000 $225,000

$180k

$100,000 $200,000
$85,000 $175,000

Individual
Contributor

Manager

$60,000 $115,000

$95k

$40,000 $85,000

$60k

35k

22,000 52,000

$25,000 $50,000

$35k

15k

18,000 32,000

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Integrated Rewards and Career Framework:

Individual Contributor Role

Rationalizing Job Levels and Titles

Professional/Expert
Career
Specialist

Entry

Intermed

Before

Accountant 1

Accountant 2

Sr. Accountant

Staff Accountant

Before

Jr. Accountant

Accountant 3

Accountant 3

Accounting 4

Before

Account Jr.

Accountant

Mgr. Accounting

Accountant Mgr

Before

Sr. Accounting

After

Associate
Accountant

Master

Expert

Sr. Staff Accountant Principal Accountant


Accounting
Coordinator

Accounting Mgr

Principal Accountant

Sr. Principal
Accountant

Spec Acct

Sr. Associate
Accountant

Accountant

Sr. Accountant

The framework serves as a foundation for rationalizing jobs and titles


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Approaches to Global Compensation Design:


Process for Implementing a New Program
Step 1:
Project Initiation &
Framework Design
Establish project
teams and
governance
Detailed project
planning
Define roadmap,
milestones and
success metrics
Define job
architecture and
framework

Step 2:
Assign all jobs to the
framework
Hold job leveling
workshops using a
common leveling
methodology

Step 3:
Assign
employees to jobs
Map employees to
new titles and levels

Develop level structure


Review and calibrate job
levels/structures across
businesses with HR and
senior management

Review by HR
generalists and line
managers

Step 4:
Design compensation
structure
Market analysis
Develop salary ranges
Establish short- and longterm incentive targets
Cost and impact analysis
Senior executive review
of recommendations
Compensation
management policies

Step 5:
Implementation
Implementation
plan
HR training
Manager training
Employee
communication
Ongoing
measurement

Project Management, Change Management and Communication


Data Management and Technology

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Questions?

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2014 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only.

Contact Information
Theresa Lynch
Consulting Director
Towers Watson
901 N. Glebe Rd.
Arlington, VA 22203
theresa.lynch@towerswatson.com
(703) 258 - 8216

Mitch Bardolf
Senior Consultant
Towers Watson
901 N. Glebe Rd.
Arlington, VA 22203
mitchell.bardolf@towerswatson.com
(703) 258 - 8111

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2014 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only.